CONCEPT REVIEW 1
Read this status-of-the-contract and assume the contract says nothing else about language.
Copies of the Contract, one in English and one in Swahiti, have been signed by bothe parties. Each party retains one copy in each language.
What are the dangers of a clause like this?
Why do you think the two sides accepted it?
1. Translations always produce conflicts; the danger here is that nobody knows
which version prevails.
2. The reason that two sides accept a loose clause like this is usually laziness — and a hope that problems will not arise. Not the best contract practice.
CONCEPT REVIEW 2
It is seldom easy to decide if a failure to perform by the other side constitutes a
"fundamental breach." Remembering that difficult cases often finish up in the courts because the lawyers for the two sides cannot agree, look at each of these situations and make your "best guess." .
1. Delivery is two weeks late. The exporter is required under the contract to pay liquidated damages of 0.5% of the contract price per week up to a maximum of 5%.
FUNDAMENTAL NOT FUNDAMENTAL NO breach
2. Same situation, except that delivery is sixty weeks late.
FUNDAMENTAL NOT FUNDAMENTAL NO breach
3. A machine that is of the greatest importance in the buyer's operations breaks down one week after delivery. There is a six month defects liability provision in the
FUNDAMENTAL NOT FUNDAMENTAL NO breach
4. The buyer agrees to open a letter of credit, but. three months after the agreed date, the letter of credit has still not been opened.
FUNDAMENTAL NOT FUNDAMENTAL NO breach
5. The buyer agrees to open a confirmed letter of credit with the First World Bank of Sheboygan. When the confirmed letter of credit arrives, it is issued by the Moon
Bank of Verbena.
FUNDAMENTAL NOT FUNDAMENTAL NO breach
1. No breach. The contract allows late delivery.
2. Almost certainly fundamental breach. Sixty weeks delay is fifty weeks longer
than the contract foresaw in the liquidated damaged provision. Such a delay
would, in most cases, go "to the heart of the contract."
3. No breach. The contract foresees cure of defects.
4. Fundamental breach
5. Probably not fundamental breach—the issuing bank has asked for, and received.confirmation by a bank in the exporter's country. The exporter' s interests are fully covered.
Settlement of Disputes
Many disputes are unnecessarily bitter because the parties did not specify a clear and detailed procedure for settling their problems. What procedures are available? What works best in the international context?
Most negotiators prefer to take disputes to arbitration before a specialist court rather than litigation before a local judge. To avoid lengthy and expensive proceedings, a well drafted contract specifies an acceptable arbitration procedure.
IN MORE DEPTH'
Signing a contract is like a wedding in that few of the people involved foresee the arguments, the disputes—even the quarrels—that generally the ahead. Unlike marriage partners, however, the panics to a contract regulate in advance, either expressly or implicitly, a mechanism for settling their disputes. If the contract says nothing explicit, then the applicable law provides the answer litigation before a judge.
Of the three options available for settling disputes, litigation before the courts is internationally the least attractive: it is public, it is expensive, it is time-consuming, and the results are very legalistic rather than businesslike. For the exporter and the buyer, litigation in a civil court creates special problems: if it sometimes appears difficult to get justice in one's own country-—in a foreign country it may seem impossible. Yet one side must inevitably appear in a foreign court. Since most people are reluctant to accept this serious disadvantage, what are the other choices?
Many contracts foresee a two-step process for dispute resolution:
* Amicable Settlement;
The first step—amicable settlement—is not essential, but it is worth considering in any export negotiation.
Amicable Settlement and Conciliation
The very word "dispute" suggests an angry confrontation between two sides each of which believes it is in the right—an unhealthy business situation. An amicable settlement clause calls for the friendly settlement of disagreements before they turn into disputes. A typical wording:
Resolution of Disputes
The Buyer and the Seller shall make every effort to resolve amicably by direct, informal negotiation any disagreement or dispute arising between them under or in connection with the Contract.
If the two sides cannot reach agreement between themselves, the resolution of their dispute requires a forum. This is a court of law unless the parties specify otherwise. In practice, most contracts do specify otherwise, calling arbitration.
Arbitration has a long history. It began with courts set up by medieval trade guilds to settle disputes among guild members. Such members-only courts kept things private and cheap; further the judges were senior practitioners of the craft who understood the business perfectly.
The other advantages of arbitration are:
* Its tendency to be quicker than litigation (at least there is no lengthy appeals procedure);
* The foreseeability of the costs.
On the other hand, costs are extremely high, and many costs- executive time invested in preparing the case, for example- can never be recovered. Even so, most contracts contain a clause specifying arbitration; compared with litigation it is generally seen as the lesser of two evils.
In drafting an arbitration clause, four practical questions must be resolved:
- How many arbitrators sit in the court?
-Where does the court sit?
-What is the language of the court?
-Who pays court costs?
Does the court of arbitration have the power to enforce its judgement and make others comply? In a direct sense, no. In practice, however, an arbitral award can normally be enforced through the civil courts. Civil courts take necessary steps to order to pay for fine or compensation because most trading countries have accepted the major international convention on the enforcement of awards- the so-called New York Convention. Others have bilateral arrangements or have signed other accords. But a word of caution is in order here: having a right to enforcement and achieving enforcement are two different things. If the buyer comes from a. country which has a. poor reputation for enforcing awards—-or if the country is not a signatory to the Convention—then the exporter should be especially careful to ensure that payment is secure preferably with an al-sight, confirmed letter of credit. Money in hand is always preferable to a right to be paid money in a far-off country.
Overall, the main concern of the two sides should be dispute avoidance, rather than dispute management. Formal dispute resolution is expensive and damaging to business relationships—even if you win.
Blue King Beer is a brewery in Verbena that exports about 40% of it production. Blue King is negotiating with a hotel chain in Esperanza to supply a range of "fancy" beers suited to the taste of tourists. The minimum contract price over a period of three years is agreed as $400,000—about 5% of Blue King's turnover. During negotiations the subject of a settlement of disputes clause comes up. How would you advise the two sides when they ask you the following questions? In each case give your reasons in the space provided.
1. Is it reasonable to omit a settlement of disputes clause completely?
yes no ..................................................................................
2. If no, should we specify arbitration? Or litigation?
ARBITRATION LiTiGATiON .................................................
3. Should we add an amicable settlement provision?
yes no .................................................................................
4. If yes, should this provision contain a detailed procedure for amicable settlement?
YES NO ..............................................................................
5. If a contract specifies arbitration, where is. the best place tor the tribunal to meet?
UNSPECIFIED BUYER'S COUNTRY neutral country
EXPORTER'S COUNTRY. COUNTRY OF THE DEFENDANT
6. Should we state that both sides accept any arbitral award as "final and binding"?
YES NO ………………………………………………………….
1. No. A sizable contract should contain a clause on settlement of disputes.
2. Arbitration—it is likely to be quicker, cheaper and more businesslike; it will not put one side at a real (or imagined) disadvantage before the national courts of the other.
3. Yes. A serious (and successful) attempt at amicable settlement can save huge sums of money.
4. Yes. A procedure ;in support of amicable settlement has been found to save considerable legal costs and management lime.
5. Possibly the country of the defendant. This creates extra costs for the side wishing to begin the dispute and thus makes amicable settlement more likely.
6. Yes. It is always worth stating this even though such clauses are not always enforceable.
CHAPTER 5: THE EXPORT CONTRACT
1. Making the Contract Safe
Once all the commercial and legal decisions have been made and put into contract form, the exporter may still be at risk. How can the last contractual risks be eliminated?
The contract must be systematically examined for weaknesses before it is signed. The four step process that examines the contract ceilings, special risks that come from the particular circumstances of the contract, risks that come from outside the contract and risks that might be hidden in the applicable law.
IN MORE DEPTH
Let’s think of the contract as an old-fashioned castle. How can the exporter make the castle safe? Obviously by looking for weaknesses and by finding ways to strengthen the castle at those points. We will have a tidy four-step approach to making our contracts safe.
STEP 1. CEILING: Are any liabilitites unlimited?
STEP 2. ROADBLOCK: What special risks should be limited?
STEP 3. IRON CURTAIN: How can the exporter limit the effect of the applicable law?
STEP 4. SIGNPOSTS: How can the exporter limit the effect of third party actions?
STEP 1: THE CEILING
The exporter will certainly notice several places where he has agreed to make payments: if he is late, for example; if a machine fails to reach promised specifications; if he is late in curing a defect; or whatever. Each of these liabilities must be capped in some way: a ceiling figure must be set. A full examination of the contract discovers where the exporter has unlimited time or money liabilities: a ceiling clause makes the situation safe.
STEP 2: THE ROADBLOCK
The most familiar roadblocks in export contracts are set up to cover force majeurre and the exporter’s liability for consequential loss or damage incurred by the buyer.
Each individual contract encounters different risks arising perhaps from:
The nature of the product;
The means of transport;
The market situation;
The economic or political situation in the exporter’s or the buyer’s country.
STEP 3: THE IRON CURTAIN
The total agreement between the two sides is their written contract plus the relevant provisions of the applicable law. It has also become clear that the applicable law- especially if it is the law of other side- can contain unwelcome surprises: rights of the buyer against the exporter, duties of the exporter that involve unexpected cost. The situation can be clarified to some extent by the inclusion of an “iron curtain” clause. The iron curtain clause, perhaps, is like a ring-wall, joining all the defensive outposts and roadblocks around Contract Castle. No approach is allowed unless it is through an accepted and understood doorway.
STEP 4: CHANGING THE ROADSIGNS
There are two likely sources of third party interference in the exporter’s contract affairs: the tax office is one, and the other are outsiders who sustain some loss or injury from goods supplied under the contract.
In his own country, the exporter must pay any taxes levied by his government- that is obvious. However, the exporter may find- especially under DDP contracts where part of the work is done and part of the profit is earned in the buyer’s country- that the buyer’s government also wishes to collect taxes from him. Naturally he cannot refuse to pay- but he can at least “change the roadsign.” He can redirect the tax office to the buyer’s address by using the standard clause on taxation.
The exporter tries to limit (or exclude) liability wherever possible. The table below shows the areas where the exporter is most at risk and actions he will try to take to reduce his liability to a foreseeable figure.
Define what counts as delay and what does not
Define what counts as a defect and what does not
If possible, pass the buck with an indemnification clause
Search for other danger areas
Limit termination for default to closely defined situations
Define excusable delay, especially force majeure
Limit duties to repairing or replacing goods with latent defects
Try to limit your total liability to your insurance coverage
Define the danger and write a clause that limits or excludes liability
Ensure that you will be paid for work performed up to the date of termination
Try to get a grace period
Exclude liability for consequential loss or damage
Try to exclude payment of damages if termination is allowed
Try to exclude other remedies if carriages are paid
SET A CEILING
ADD AN IRON CURTAIN
“All rights and duties not expressly included are excluded.”
(page 203) USING A MODEL CONTRACT
Asking a lawyer to draft a complete contract for each export deal does always make economic sense: the time and money invested are out of proportion to the value of the contract. In such cases, the exporter is tempted to proceed without any kind of contract. Is this dangerous? Why or why not?
A model contract is a half-way house between the dangerous practice of trading without a contract and the expensive practice of asking a lawyer to tailor a contract for each deal. No model contract can regulate every problem, but most important issues can be addressed and reasonable alternatives suggested.
International trade between companies on different continents with different cultures and different concepts of law cannot risk such informal proceedings. For an agreement to be clear, workable and enforceable, it must normally be reduced to a written, signed contract.
IN MORE DEPTH
Unfortunately, asking a lawyer to draft a contract for each new agreement is costly and time-consuming; many companies simply don’t bother. This is where a “model contract” is helpful. Unfortunately, however, using a model contract is not as easy as it sounds. Many model contracts are too general; with over 150 nations in the world, each with its own law – no model contract can cover them all. Other models are too specialized: a model contract designed for use in England offers offers little guidance to an Ethiopian exporter trying to sell a machine to Vietnam. In every case, a model contract requires adaption before it meets the needs of the two sides.
Translate the following Convention into Vietnamese. The translation given on the right serves as example for you to continue.
ICC MODEL CONTRACT FOR THE SALE OF GOODS
Hợp đồng Mẫu Xuất nhập khẩu Hàng hóa của Phòng TM Quốc tế
1. THE CONTRACT IN ENGLISH
CONTRACT FOR THE SALE OF GOODS
...................................... hereinafter called "the SELLER"
...................................... hereinafter called "the BUYER"
(NOTE: The Preamble is optional) '
The agreement between the parties to this Contract is based on the following understandings:
(NOTE: The following clauses are examples only. Delete as
1. The BUYER is acting partly on its own behalf and partly as a purchasing agent for other companies
2. The BUYER is acting as purchasing agent for .....................'
3. Both parties understand that Goods made to the buyer's special specifications may have no value or very limited value on the open market
4. The SELLER understands that the BUYER in specifying the Goods has relied to a large extent on the expertise of the SELLER
5. The SELLER understands that the BUYER is under contract to resell the Goods and that if the Goods are defective or non-conforming in quality or quantity, the BUYER may be liable for damages in an amount exceeding .....................(Currency and amount)
6. The SELLER understands that the BUYER intends to install the Goods as a component part in equipment to be resold, and that if the Goods are defective or non-conforming in quality or quantity, the BUYER may be liable for substantial damages
7. …………………………..(List of additional background understandings between the parties)
1. Applicable Law
This Contract and all questions relating to its formation, validity, interpretation or performance shall be governed by the law of.............(Name of country)
(NOTE: The subclause below is optional)
This Contract shall not include, incorporate or be subject to the provisions of the "United Nations Convention on Contracts for the International Sale of Goods"
In this Contract the words below have the meanings ascribed to them unless the context otherwise clearly dictates:
2.1. Unless expressly modified by the parties, "FOB", "CIF" and other trade terms have the meanings and obligations ascribed to them in Incoterms 2000, Publication 460 of the International Chamber of Commerce, Paris
2.2. "Contract" means this Contract, its preamble and appendices, as well as all documents expressly listed as Contract documents or otherwise expressly mentioned in this Contract
2.3. "Goods" means the Goods specified in Clause 4 below
2.4. "Price" means the Price as specified in Clause 9 below payable to the SELLER for the Goods
2.5. "Delivery" means Delivery as specified in Incoterms 1990 under the Incoterm or Incorterms agreed in this Contract
2.6. "Day" means a calendar Day. For the purposes of this Contract, Saturdays, Sundays and all holidays are considered as Days
2.7. "Direct" costs and losses are costs and losses arising in immediate connection with any failure to deliver, any delay in Delivery or any defect in Goods delivered under this Contract.
Such costs and losses must have an immediate, foreseeable and probably causal connection with the delay or defect. All other costs and losses are deemed by this Contract to be "indirect"; In particular, loss of profit, loss of use, and loss of contract are considered indirect losses
2.8. "Government" means national Government, local Government, local authorities, and their agencies. In particular customs and/or excise departments are considered
as Government agencies
2.9. "Termination" means the discharge of the Contract by one of the parties under any right expressly granted by this Contract; The discharge of the Contract by any other right arising from the applicable law or any oilier source is deemed to be "cancellation" of the Contract
2.10. ........................(list of additional definitions agreed between the parties)
3. Entire Agreement and Contract Documents
This Contract constitutes the entire agreement and understanding between the parties. There are no understandings, agreements, conditions, reservations, or representation, oral or written, that are not embodied in this Contract or that have not been supersede by this Contract
(NOTE: The subclause and list below are optional)
In addition to the text of Contract itself, the documents listed below shall form part of the Contract; All listed documents and the clauses of this Contract shall be read, if possible, so as to be consistent; In the event of conflict, the order of precedence for the provisions and documents which constitute this agreement shall be as follows:
(NOTE: The list below contains examples only. Delete as appropriate)
a. Any alterations made on the face of the printed Contract
b. The Contract itself
d. Manufacturing drawings
e. The buyer's Special/ General Conditions of Purchase
f. The seller's SpeciaVGeneral Conditions of Sale
g. .....................................................................( Further contract documents).
4. Scope of Supply
The Goods to be delivered under this Contract are specified .......(Use "below" or_the name of the annex where the goods are specified)